Re: Don't hold your breath waiting for Bernanke to raise rates - Eric Janszen

[seobook]

EJ, straighten me out on this.

Even a modest rise in mortgage rates will slam the housing market.

Are not housing prices fixed on the monthly ability to pay? (I'm foregoing actual construction cost in this question. Existing "previously owned" housing stock only, not developer's on-hand supply.) Then would not a raise in interest rates see an accommodating lowering of pricing to maintain the sell-able monthly amount? Do not near-ZIRPs help to keep housing prices artificially elevated?

In an iTulip essay from a few years back that point was quite clearly made. What am I missing?

[seobook]

"would not a raise in interest rates see an accommodating lowering of pricing to maintain the sell-able monthly amount?"

Many buyers buy projecting past inflation into the future. If prices fall the rush to get in goes away. Also the person who has a current loan they can afford at x % APR is paying $ y per month. If rates jumped dramatically and they still owed money on their old loan they probably would not be able to get another loan for a similarly valued home...so they would be exiting, for example, a 3.2% mortgage, and if rates were at 5% or 6% then the new loan they get would be at that higher rate. Both properties falling a similar amount would not offset that their new loan is at a higher rate.

And the above simplified scenario ignores the moral hazard of people with no (or negative) equity in their homes letting the property degrade as they live without rent or mortgage payment for a while due to loan deferrals or a temporary prohibition on foreclosures & evictions. Then there are all the players in the market leveraged long with the stuff.

The Federal Reserve literally is the market.

https://www.wsj.com/articles/mortgag...ed-11600248600
"People are taking out lots of mortgages. The Fed is gobbling them up. Low mortgage rates have spurred a boom in home refinancing, which in turn has spurred a boom in the issuance of mortgage-backed securities. The value of single-family mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac totaled almost $322 billion in August, a new monthly record, according to an analysis by industry-research firm Inside Mortgage Finance."

Their impact created such a surge in demand that closing can take double or triple normal.

https://finance.yahoo.com/news/lende...155228656.html "The mortgage application process should take 30 to 45 days, but applicants are waiting an average of 45 to 120 days, according to Snapdocs, a San Francisco-based digital mortgage closing company."

Also the types of properties people desire to sell vs desire to buy might be different, causing some people to be headed in the wrong direction with some property prices falling even as others hold up.

https://www.wsj.com/articles/u-s-exi...ne-11598018897
"Buyers are ready to move farther from cities, now that many workers aren’t commuting every day. The pandemic has spurred some households to live closer to family, or somewhere that offers more space with so much time spent at home, brokers and economists say. ... The July sales numbers were among the strongest the housing market has ever seen. Sales of previously owned homes jumped 24.7% from a month earlier to a seasonally adjusted annual rate of 5.86 million, according to the National Association of Realtors on Friday. That was the strongest monthly gain ever recorded, going back to 1968. It was also the highest sales pace since December 2006. ... Demand is so robust that 68% of the houses that sold in July were on the market for less than a month, NAR said."

This is a record year for loan originations
https://www.nationalmortgagenews.com...ear-fannie-mae
"The latest forecast calls for $3.87 trillion in mortgage originations this year, the best in the 32 years that Fannie Mae has been tracking this data. In August, Fannie Mae predicted $3.41 trillion of volume. ... The biggest share gain will be seen in new home sales, now predicted to rise by 13.9%. A month ago, he saw a slight 1% gain."

If they have to ease up on purchases because of increasing inflation expectations leading to rising rates that would mean base treasury rates were higher & the spread between those rates and mortgage rates would also increase. And then that pace of home construction growth would slow. And on and on.